What Makes the Crypto Currency Market Volatile? 6 Key Reasons

Crypto volatility is driven by a myriad https://www.xcritical.com/ of factors that contribute to the unpredictable price fluctuations experienced by digital assets. Unlike traditional financial markets, cryptocurrencies operate in a decentralized environment, making them particularly susceptible to external influences. These influences include market demand, investor sentiment, regulatory developments, technological advancements, and many more. Cryptocurrency volatility is not isolated from traditional financial markets.

What is volatility: Understanding Market Swings

DCA involves investing a fixed amount of money at regular intervals (e.g., monthly) regardless of market conditions. Volatility skew refers to differences in implied volatility crypto volatility trading across different strike prices. ATR measures market volatility by considering the true range (high – low) over a specified period. Between April and June, Bitcoin’s value more than halved, from just over $45,000 to around $20,000; other coins have fallen even more.

Characteristics of Cryptocurrencies Leading to Volatility

The highly speculative nature of the market, combined with the potential for regulatory changes and technological developments, means that it is difficult to accurately predict future trends in crypto volatility. In summary, the 6-hour BTC/USDT chart shows a market with higher volatility compared to the 30-minute chart. The high VIX and increased Historical Volatility suggest significant price fluctuations are expected. The market trends are mixed, with periods of both upward and downward movements, evidenced by the choppy nature indicated by the Choppiness Index. The positive Rate of Change points to moderate upward momentum, but overall, the market lacks a strong directional trend over this longer period.

Strategies for Trading Crypto During Volatile Phases

Crypto whales can manipulate crypto prices, no matter the cryptocurrency, be that Bitcoin, Ethereum, Dogecoin, or otherwise. Thousands of different cryptocurrencies exist, with new projects and tokens launching every day. However, when competition becomes too intense, it can lead to a decrease in prices by driving down the value of all cryptocurrencies, including Bitcoin and Ethereum. Consequently, as mining costs increase, it follows an increased value of the cryptocurrency. Miners won’t continue to mine if the value of the currency they’re mining isn’t high enough to cover their costs.

Best Volatility Indicators for Crypto Trading

However, this creates short-term volatility in cryptocurrency prices as miners switch to more profitable tokens or hold onto tokens for a longer time. This volatility may even affect the long-term success of certain tokens and cause them to lose market share over time. Once people consider the coin overvalued and lose money on it, the hype and speculation die and eventually lead to a price collapse as the bubble bursts. It’s quite common for cryptocurrencies to experience huge spikes and then crashes as a result. For instance, Dogecoin plummeted by 91% after Elon Musk’s SNL appearance in May 2021.

Setting Realistic Expectations in Volatile Markets

When comparing crypto volatility with other financial markets, such as stocks or commodities, notable distinctions become apparent. Traditional financial markets typically exhibit lower volatility levels due to factors such as well-established regulations, larger market caps, and longer operating histories. This relative stability can make traditional markets appear less volatile compared to the crypto market. Through thorough research, risk management, and disciplined trading strategies, traders can navigate market swings and minimise potential losses.

Comparing Traditional and Cryptocurrency Derivatives

As a comparison, stocks, bonds and commodities will exceptionally rarely exhibit such high volatility levels. It is therefore understandable that increased volatility is something that few people know how to handle. However, there comes a point in any trader’s life when they start having a better understanding of volatility.

Comparison of crypto volatility with other financial markets

Crypto markets are known for their wild price swings, which can make it difficult to predict future trends and make informed investment decisions. In this article, we will explore the concept of volatility as it pertains to crypto, and why it is a defining aspect of this emerging asset class. Volmex is the world’s first crypto volatility protocol with the goal of enabling traders and investors to navigate crypto markets based on comprehensive volatility analysis, insights, and tools.

• Instead of fearing volatility, understanding its causes and implications can help individuals make more informed decisions and potentially capitalise on the opportunities it presents.
• Similar to the shorter interval chart, this high VIX value indicates that the market expects high volatility over the next 30 days.
• In the context of cryptocurrencies, the volatility reflects the rapid and often substantial price fluctuations observed in the digital asset space.
• In this section, we’ll review the underlying reasons for crypto volatility as well as examine the numerous elements at play in fostering it.

Volatility is a prominent characteristic of the cryptocurrency market that — for now — does not appear to be ending soon. Instead of fearing volatility, understanding its causes and implications can help individuals make more informed decisions and potentially capitalise on the opportunities it presents. Macroeconomic events, such as economic crises or geopolitical tensions, can also fuel volatility in the cryptocurrency market. These events can create a flight to safety, causing users to either buy or sell cryptocurrencies in response to broader market uncertainties.

As the market evolves, it is crucial to explore how technology and broader adoption could shape volatility trends. During the trade war between the United States and China, Bitcoin and other cryptocurrencies experienced heightened volatility as investors sought refuge from traditional markets. We explore the volatility of crypto markets compared to that of traditional financial markets.

Volatility is nothing new for cryptocurrencies and, in fact, should be expected. There have been six periods of significant decline in bitcoin (along with other altcoins) since bitcoin’s inception in 2009. Synthetics are an abstract asset class with concrete effects on the digital economy. The DCA strategy means buying small amounts of cryptocurrencies over a long period rather than buying an entire position from the start (aka lump-sum investing). Finally, indexes like the Crypto Volatility Index (CVI) also monitor the average price changes in the crypto market and quantify these fluctuations in an easy-to-scan graph. As such, we believe the crypto market needs a volatility index that is decentralized and dynamic, unbiased, and not connected to any exchange.

However, it is important to recognize that volatility may never be fully eliminated, as it is inherent to the crypto market, and to a much smaller extent, to the other financial markets as well. These digital assets are designed to maintain a stable value by being pegged to an underlying asset, such as a fiat currency or a basket of assets. During times of high volatility, traders can use stablecoins as a means of preserving their capital. By converting their crypto holdings into stablecoins, they can reduce their exposure to the inherent volatility of other cryptocurrencies. Stablecoins provide a level of stability within the crypto market, allowing traders to navigate turbulent times with more confidence. Cryptocurrency volatility can be significantly impacted by global events that can send shockwaves through the market.

In essence, volatility is a prominent feature of the cryptocurrency market that cannot be ignored. Further understanding volatility can allow traders to develop effective strategies to navigate market swings. In contrast, many cryptocurrency derivatives markets are accessible to, and heavily comprised of, retail traders. High leverage can amplify the risk of losses as well as gains, so should be used with caution. Experienced traders use risk management techniques such as trading with only a small percentage of their portfolio and planning the entry and exit points for a trade. The risks that come with cryptocurrency volatility, cannot be overemphasized.

It can be healthy, with steady increases or decreases in price within a general range. Healthy volatility serves many purposes in a market, but it mainly creates opportunities for profit. For example, stock price changes enable traders to buy low and sell high, or “short” a stock they expect to decrease in price. Extreme volatility occurs when an asset’s price changes rapidly within a short time.

As spot prices stay weak, this trend reflects broader market skepticism toward positive price action shortly. The volatile nature of the cryptocurrency markets makes them attractive to many traders since they offer plenty of speculative opportunities. However, volatility comes with some amount of risk since the market can quickly move against a profitable position. The Historical Volatility (HV) is recorded at 9.72, which is slightly higher than in the 30-minute chart. This increase suggests that the market has experienced more volatility over this longer period.

An avid reader and prudent researcher, Benjamin always aims at improving audience engagement, and blog visibility. Cryptocurrency operates in a whole different world compared to traditional currencies. These unique characteristics contribute significantly to the price swings we see in the crypto market. The platform integrates Chainlink’s low latency oracles for real-time position management, allowing traders to make more informed and timely decisions.